ICICI, HDFC Bank, Axis flouted norms but no money laundering

Following the investigation, the RBI has asked the private lenders to tighten compliance with anti-money laundering and KYC norms. Photo: Mint

Updated: Wed, May 15 2013. 12 00 PM IST

Mumbai: An investigation conducted by the Reserve Bank of India (RBI) into three private lenders—ICICI Bank Ltd, HDFC Bank Ltd and Axis Bank Ltd—revealed that they may not have been involved in money laundering “in the strictest sense” but there could be instances of tax evasion.

The inquiry followed allegations by online magazine Cobrapost.com in March that these lenders were involved in a “nationwide money laundering racket”.

The RBI probe also found a nexus between the lenders and cooperative banks for large-value cash transactions and violations of norms on the sale of gold and other investment products.

A day after CNBC TV-18 first reported the findings of the RBI probe, the leaked report was doing rounds on Tuesday, sent from an email account that appeared to have been created for this purpose, exposerbi@gmail.com.

The banks involved, busy preparing responses to the regulator’s show-cause notices, either declined to comment for this story or were not available for comment.

Meanwhile, Aniruddha Bahal, editor in chief of Cobrapost, issued a statement demanding RBI “satraps”—governor D. Subbarao and deputy governor K.C. Chakrabarty—resign “on moral grounds” and that the top management of the three banks be sacked.

“The finding of the scrutinies, no doubt indicate some lacunae in the systems and controls in the banks which might have facilitated conduct of same transactions which are not in true with regulatory guidelines,” the RBI said.

Stocks haven’t reacted to the allegations and the RBI probe. Since the Cobrapost report was released in mid-March, Axis Bank has gained 15.21%, ICICI Bank 20.36% and HDFC Bank 30.76%, while BSE’s benchmark Sensex has gained 10.06% and the banking index, Bankex, is up 14.89%.

The RBI probe has found that both ICICI Bank and Axis Bank are involved in instances of splitting up of cash deposits below Rs.10 lakh to avoid these being reported as CTR (cash transaction report). Also, the banks were found to be accepting cash of Rs.50,000 and above without the depositor’s permanent account number (PAN) or there were multiple and large-value transactions in form 60 accounts in some cases. Form 60 needs to be filled up when there is no PAN, an income tax ID, available.

That apart, customers were also found to be structuring cash deposits of more than Rs.50,000 into smaller amounts to avoid having to fill in PAN details that could be used to go under the income-tax radar.

The RBI investigation also found that there was a “nexus” linking Axis and HDFC with coopertaive banks while executing certain cash transactions to avoid tax.

About 20 cooperative banks have drawn money from Axis bank through cheques, while in the case of HDFC Bank, there are a number of large-value transactions (Rs.10 lakh and above) for investments in mutual funds, the report said. “The present arrangements between commercial banks and co-operative banks reveal a number of serious systemic and supervisory concerns as the risks from weak KYC/AML (anti-money laundering) compliances by cooperative banks are transmitted to the commercial banks,” the report said.

“Due to the poor track record of the cooperative banks in adherence to the AML guidelines for reporting CTRs, these banks may be an easier conduit for facilitating substantial amounts of cash in entering the banking system. It is, however, difficult to say to what extent this represented black money/unaccounted money.”

The investigations also revealed that there was no KYC/AML compliance for walk-in customers to whom HDFC bank had extended insurance products. Further, Axis Bank was found to have issued prepaid cards to a large number of its customers including multi-level marketing (MLM) firms without fully complying with KYC norms and regulations.

The more dubious kind of MLM firms are those that accept deposits and resemble pyramid schemes.

“The bank has been prohibited from issuing any prepaid card instrument by DPSS (Department of Payment and Settlement Systems), RBI. It also opened more than 5,000 current accounts based on power of attorney to facilitate trading in stocks by certain stock brokers, without fully completing the KYC documentation,” RBI said.

All three banks have also issued multiple IDs to the same customer, in violation of existing norms, the RBI investigation has found.

In the case of ICICI Bank, the investigation found that in 14 branches under the scanner there were 987 customers with multiple IDs, RBI said.

Gold sale via credit card

The investigation has also found that banks allowed credit cards as a mode of payment for the purchase of gold, which is not permissible under existing norms.

“In a number of cases, persons having the same name purchased gold from the same branch on the same day splitting cash transactions below Rs49,999. Credit card was also allowed as mode of payment for purchase of gold even contrary to RBI’s direction that no advances should be granted by banks for purchase of gold in any form,” RBI said.

Incidentally, all purchases by credit card are reported as loans and advances under Schedule 9 of the balance sheet, in the case of ICICI Bank and HDFC Bank.

In several instances, Axis Bank sold gold coins/bars worth more than Rs.500,000 in a single transaction without asking for PAN in violation of CBDT guidelines, the report said.

The RBI probe has come down heavily on the “perverse incentive structure in banks” responsible for some transactions taking place without strict adherence to the applicable regulations.

“It was noted that 2,164 employees of HDFC Bank, as a corporate agent, at different levels were offered foreign trips by HDFC Standard life Insurance Co. Ltd and HDFC Ergo General Insurance Co. Ltd and the purpose of such visits was no evidenced”, the report said

The foreign trips accepted by the bank employees were over and above the commission offered by the insurance companies, the RBI investigation found.

ICICI Bank allowed its relationship managers to go on various foreign trips offered by insurance partners under their rewards and recognition programme.

“This arrangements raise serious doubts on the ‘arms length’ relationship the entities are required to maintain with their group entities,” the report said.

HDFC Bank has also appointed audit firm Deloitte Touche Tohmatsu India Pvt. Ltd and law firm Amarchand and Mangaldas and Suresh A Shroff & Co. to investigate the allegations.

Following the investigation, the RBI has asked the private lenders to tighten compliance with anti money laundering and KYC norms, besides exercising caution while awarding incentives to employees, among others.

“The finding of the scrutinies, however, give some comfort in the sense that the transactions, both in terms of number and value based on the sample checks, are not huge or substantial by any stretch of imagination, so as to warrant allegations of money laundering in our banking system. Hence, it is not a systematic issue,” the RBI said.